Energy & Sustainability

Seeing through the energy and sustainability matrix

With escalating political pressure from rising atmospheric carbon dioxide levels, governments worldwide face a multidecade challenge: how to decarbonize while preserving the global economy. Energy is the basis for which the economy operates. Constraining access to energy risks societal dislocation and conflict, which we are witnessing today.

By taking a holistic systems approach, we can understand that like the food we consume, not every joule of energy is the same. How we use these basic units of energy and steward our resources will determine the velocity by which we can transition our energy system and avoid unintended consequences such as capital destruction and social collapse.

At William Blair, we understand the nuances of today’s energy transition and have formed a new energy and sustainability research group to provide industry leading analysis to clients. We view energy generation, efficiency, storage, and sustainability services as the energetic forces driving the sector.

Electricity generation has been dominated by fossil fuels, like coal and natural gas. As the extraction of fossil fuels becomes increasingly costly and their energy return on investment at point of use (EROIpou) decreases, we believe utilities and independent power producers will accelerate investments in higher-EROIpou sources, such as renewable and nuclear generation assets. The growth of these, particularly wind and solar, should provide increasing net energy to the economy. Further, while fossil fuels have certain benefits—high energy density, lack of intermittency, portability, established infrastructure—renewables provide energy that is both clean and inexhaustible.

Electrification is one of the key trends shaping the global energy transition. There are several reasons why, but at the core electricity offers the greatest available work. This means the conversion efficiency in an electric vehicle, for example, is 90% from stored energy into torque at the wheels. This compares to a 20% conversion rate using combustion. We see efficiency and technology not as a panacea but rather as a companion to new sources of generation, storage, and service models.

The storage of energy is a critical component of the energy transition and electrification. As we know, the wind isn’t always blowing and the sun isn’t always shining, making renewable energy contribution to the grid inherently intermittent. If there is one thing our energy infrastructure cannot be, it is intermittent. Energy storage is crucial for function and/or efficiency.

As the scarcity of resources increases over time, the quality of those resources will decline. In this scenario, we expect the value of efficiency optimization will continue to increase. We have identified several categories of sustainability services business models that improve resource optimization. These include companies that can help businesses and consumers increase energy efficiency, enable higher reuse of waste streams, and save water through greater efficiency and/or higher reuse rates.

Energy is the lifeblood of our economic system. It drives production and transforms capital, which we have benefited from greatly over the past two hundred years. By understanding what can and cannot be done, our methodology focuses on real value creation built on the immutable laws of thermodynamics.

Jed Dorsheimer